Cost of Improper Earned-Income Tax Credits: $10 Billion

Improper claims for the Earned Income Tax Credit continue to cost the government more than $10 billion a year, and there’s not much more the IRS can do about the problem with existing methods, a new report said.

The EITC is among the federal government’s biggest anti-poverty programs of any kind. It often wipes out federal income-tax liability for low-income working families, and frequently provides a cash payment of several thousand dollars over and above that.

Unfortunately, it’s also a case study in the problems that can occur when Washington delivers benefit programs through the individual tax system.

The EITC’s complex rules help lead to high error rates by taxpayers and even paid preparers. It’s also vulnerable to fraudulent claims, despite some elaborate safeguards that have been built in over the years. The payments paid out improperly for 2012 were at least 21-25% of all payments, according to the latest report from the IRS inspector general. The report estimated that improper payments totaled between $11.6 billion and $13.6 billion for 2012, out of total EITC claims of $55.4 billion.

That’s better than a decade ago, when the improper payment rate was between 25% and 30%. But the IRS “acknowledges that further reductions in the EITC improper payment rate will be difficult to achieve,” says the new report. The inspector general’s report urges the IRS to consider alternative to its traditional compliance efforts.

Improper payment rates for non-tax benefit programs such as housing and some nutrition programs are often much lower than the EITC’s rate.

Republicans suggested the same problems could crop up with the new individual tax subsidies created by the Obama administration’s health-care overhaul.

“Refundable tax credits are a nightmare to administer and lead to far too much of the American people’s money going out to those who aren’t eligible. That the IRS can’t figure out how to rein in the improper Earned Income Tax Credit payments doesn’t bode well for the $1.1 trillion in ObamaCare subsidies,” said Sen Orrin Hatch (R., Utah) in a prepared statement.

Acting IRS commissioner Daniel Werfel said at a congressional hearing last summer that the EITC and health care credit are designed differently. That will be “helpful in reducing the instances of fraud” in the health-care program, he said. One big difference is that taxpayers don’t get the money from the credit – insurers do – Mr. Werfel said.

The IRS said in statement Monday: “Every year, the IRS conducts 500,000 EITC audits as part of a broader enforcement strategy, and EITC claims are twice as likely to be audited as other tax returns. The IRS protects nearly $4 billion in improper claims each year and is committed to continuing to work to reduce improper claims. As the data in the TIGTA report shows, there has been a significant decline in the improper payments since 2010.”

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